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Types of Bonds

Bond Funds

Many investors who want to reap the good returns available in the corporate bond market buy shares in bond mutual funds instead of individual bonds—or in addition to individual bonds. They do so for the same reasons investors have flocked to mutual funds of all kinds in recent years—diversification, professional management, modest minimum investments, automatic dividend reinvestment, and other convenience features.

Diversification is an especially important advantage of bond funds. Many investors in individual bonds buy only a few securities, thus concentrating their risk. A fund manager, by contrast, spreads credit risk, interest-rate risk and, indeed, all other kinds of risk, over many bonds. Different issuers, sectors, credit ratings, coupons and maturities are all represented in a diversified portfolio.

However, lower risk does not mean no risk. All the underlying risks that affect bonds affect bond funds—but not as sharply. You should be aware that prices of bond fund shares fluctuate inversely with interest rates, just as individual bonds’ prices do, and when you sell fund shares, they may be worth more or less than you paid for them.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.